Europe moving towards the creation of a new banking framework to prevent future crises. Sterling proving to be the best performing currency for the past six months

Tom Tong13/Sep/2013Currency Updates

EUR

There has been something of a reality check following the recent raft of positive news on the eurozone economy, with some analysts suggesting that since the second quarter the eurozone may have lost steam. An unexpectedly sharp contraction of the eurozone’s industries in July, announced yesterday, casts a cloud over the currency union’s fragile exit from recession.
Industrial production dipped by 1.5% between June and July, meaning that production is down by 2.1% overall compared to a year ago. Despite producing small growth in the second quarter, many analysts were sceptical yesterday that this growth will continue.

Nascent growth has been further dampened by the news that the Black Sheep of the eurozone was still mired in a deep recession in June, with Greek unemployment hitting a new record high of 27.6%. For June, the overall unemployment rate for the currency union was 12.1% – only 5.4% in Germany.

Announcements on the August Consumer Price Inflation were also made in Spain, France and Italy yesterday, coming in at 1.5, one and 1.2 per-cent respectively. All were below the European Central Bank’s target for price rises at just below two per-cent.

A more significant step was taken yesterday when Europe moved towards creating a single banking framework after EU lawmakers granted new powers to the European Central Bank to oversee some 6,000 banks in the 17 eurozone countries. This step towards a single authority in the eurozone is seen as a critical step in defending against future crises.

The eurozone will also welcome it’s 18th member on January 1st 2014 when Latvia adopts the Euro in exchange for its Lat. Latvia has been utilising harsh austerity measures to maintain its pre-entry currency peg to the Euro. Latvia was the eurozone’s fastest-growing economy in both 2011 and last year, posting annual GDP growth of more than 5%. The economy is expected to expand by 4.2% this year.

Announcements from the eurozone today are few, with Q2 Employment Changes YoY and MoM coming out at 9am.

GBP

Sterling has continued to strengthen this week. Amid the UK economy performing better than sceptics expected, the pound has proven to be the best performing major currency the past six months.

Positive UK unemployment figures released on Wednesday pushed sterling to a seven month high confirming the economy’s recovery is gathering pace. It set a four year high against the yen and touched records against Turkish Lira and Indian Rupee, while it strengthened at least 1.9% against its most traded peers.
In other news Mark Carney has continued to stress the importance of inflation, while making it clear he is “vigilante” of the current booming housing market. After the BOE confirmed they had underestimated inflation forecasts for 18 months ahead as much as 1.5%. Carney tried to assure the market that he would not take risks with inflation expectations, whilst at the same time warning that unemployment may fall more slowly than markets had expected, because of the downturn caused by the number of people out of work for a sustained period.

There are no economic data releases for the UK today.

USD

The greenback clawed back some of its losses yesterday from the week as the dollar index saw a gain of 0.1%, despite being on a loss for the week of 0.7%.

Yesterday saw a fall in the US Jobless claims from 323,000 to 292,000 which impacted the strength of the dollar. Although on paper this seems a significant move, it was heavily influenced by a change in the computer networks of two states which may have distorted the figures.

The most significant data releases out of the US today are Retail Sales MoM for August and Reuters/Michigan Consumer Sentiment Index for September. These are expected to post positive readings. However, all eyes will be focused on the federal meeting is due to take place on Tuesday and Wednesday. Over the speculation of just how much they will taper stimulus, this will keep the dollar on its toes.

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Written by Tom Tong

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